[Federal Register Volume 68, Number 130 (Tuesday, July 8, 2003)]
[Proposed Rules]
[Pages 40579-40581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17091]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-130262-03]
RIN 1545-BC28


Guidance Under Section 1502; Stock Basis After a Group Structure 
Change

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 1502 
that relate to stock basis after a group structure change. These 
proposed regulations affect corporations filing consolidated returns.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 6, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-130262-03), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand-delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG-130262-03), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC 20044. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Marlene Oppenheim or Ross Poulsen, (202) 622-7770; concerning 
submission of comments and/or requests for a public hearing, Sonya 
Cruse, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    Section 1.1502-31 applies if one corporation (P) succeeds another 
corporation (T) under the principles of Sec.  1.1502-75(d)(2) or (3) as 
the common parent of a consolidated group in a group structure change. 
If a corporation acquires stock of the former common parent in a group 
structure change, the basis of the members in the former common 
parent's stock immediately after the group structure change is 
generally redetermined to reflect the former common parent's net asset 
basis. In general, the group structure change regulations were designed 
to prevent disparate basis consequences resulting from different forms 
of transactions that effect a restructuring of a consolidated group 
that continues to exist following the restructuring.
    The IRS and Treasury are concerned that the application of the net 
asset basis rule may produce inappropriate results on the disposition 
of stock acquired in a transaction in which, under generally applicable 
rules, the basis of the acquired stock would otherwise be determined by 
reference to the acquiror's cost for the stock. Accordingly, this 
document proposes to modify the application of the provisions of Sec.  
1.1502-31 to permit the basis of stock acquired in a recognition 
transaction to reflect the cost of the acquired stock.
    In particular, this document excepts from the application of the 
net asset basis rule stock acquired in a transaction in which gain or 
loss was recognized in whole. These regulations are proposed to apply 
to group structure changes that occur after the date these regulations 
are published as temporary or final regulations in the Federal 
Register. With respect to group structure changes that occur on or 
before the date these regulations are published as temporary or final 
regulations in the Federal Register and during consolidated return 
years beginning on or after January 1, 1995, these regulations are 
proposed to apply at the election of the group.

[[Page 40580]]

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations do not have a significant impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations primarily will affect affiliated groups 
of corporations, which tend to be larger businesses. Moreover, the 
number of taxpayers affected is minimal and the regulations will 
simplify basis determinations. Pursuant to section 7805(f) of the 
Internal Revenue Code, these proposed regulations will be submitted to 
the Chief Counsel of Advocacy of the Small Business Administration for 
comment on their impact.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the proposed 
regulations. All comments will be available for public inspection and 
copying. A public hearing will be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Marlene Oppenheim 
and Ross Poulsen, Office of Associate Chief Counsel (Corporate). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.1502-31 is amended by revising paragraphs (b)(2), 
(d)(2)(ii), (g), and (h) to read as follows:


Sec.  1.1502-31  Stock basis after a group structure change.

* * * * *
    (b) * * *
    (2) Stock acquisitions. If a corporation acquires stock of the 
former common parent in a transaction that is a group structure change, 
the basis of the members in the former common parent's stock 
immediately after the group structure change (including any stock of 
the former common parent owned before the group structure change) that 
has, or would otherwise have, a basis determined in whole or in part by 
reference to the basis of the property exchanged for such stock is 
redetermined in accordance with the results for an asset acquisition 
described in paragraph (b)(1) of this section. For example, if all of 
T's stock is contributed to P in a group structure change to which 
section 351 applies, P's basis in T's stock is T's net asset basis, 
rather than the amount determined under section 362. Similarly, if S 
merges into T in a group structure change described in section 
368(a)(2)(E) and P acquires all of the T stock, P's basis in T's stock 
is the basis that P would have in S's stock under paragraph (b)(1) of 
this section if T had merged into S in a group structure change 
described in section 368(a)(2)(D).
* * * * *
    (d) * * *
    (2) * * *
    (ii) Stock acquisitions. If less than all of the former common 
parent's stock is subject to the redetermination described in paragraph 
(b)(2) of this section, the percentage of the former common parent's 
net asset basis taken into account in the redetermination equals the 
percentage (by fair market value) of the former common parent's stock 
subject to the redetermination. For example, if P owns less than all of 
the former common parent's stock immediately after the group structure 
change and the basis of such stock would otherwise be determined in 
whole or in part by reference to the basis of the property exchanged 
for such stock, only an allocable part of the basis determined under 
this section is reflected in the shares owned by P (and the amount 
allocable to shares owned by nonmembers has no effect on the basis of 
their shares). Alternatively, if P acquired 10 percent of the former 
common parent's stock in a transaction in which the stock basis was 
determined by P's cost, and P later acquires the remaining 90 percent 
of the former common parent's stock in a separate transaction that is 
described in paragraph (b)(2) of this section, P retains its cost basis 
in its original stock and the basis of P's newly acquired shares 
reflects only an allocable part of the former common parent's net asset 
basis.
* * * * *
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, all corporations have only one class of stock 
outstanding, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, all transactions are between unrelated 
persons, and tax liabilities are disregarded. The principles of this 
section are illustrated by the following examples:

    Example 1. Forward triangular merger. (i) Facts. P is the common 
parent of one group and T is the common parent of another. T has 
assets with an aggregate basis of $60 and fair market value of $100 
and no liabilities. T's shareholders have an aggregate basis of $50 
in T's stock. In Year 1, pursuant to a plan, P forms S and T merges 
into S with the T shareholders receiving $100 of P stock in exchange 
for their T stock. The transaction is a reorganization described in 
section 368(a)(2)(D). The transaction is also a reverse acquisition 
under Sec.  1.1502-75(d)(3) because the T shareholders, as a result 
of owning T's stock, own more than 50% of the value of P's stock 
immediately after the transaction. Thus, the transaction is a group 
structure change under Sec.  1.1502-33(f)(1), and P's earnings and 
profits are adjusted to reflect T's earnings and profits immediately 
before T ceases to be the common parent of the T group.
    (ii) Analysis. Under paragraph (b)(1) of this section, P's basis 
in S's stock is adjusted to reflect T's net asset basis. Under 
paragraph (c) of this section, T's net asset basis is $60, the basis 
T would have in the stock of a subsidiary under section 358 if T had 
transferred all of its assets and liabilities to the subsidiary in a 
transaction to which section 351 applies. Thus, P has a $60 basis in 
S's stock.
    (iii) Pre-existing S. The facts are the same as in paragraph (i) 
of this Example 1, except that P has owned the stock of S for 
several years and P has a $50 basis in the S stock before the merger 
with T. Under paragraph (b)(1) of this section, P's $50 basis in S's 
stock is adjusted to reflect T's net asset basis. Thus, P's basis in 
S's stock is $110 ($50 plus $60).
    (iv) Excess loss account included in former common parent's net 
asset basis. The facts are the same as in paragraph (i) of this 
Example 1, except that T has two assets, an operating asset with an 
$80 basis and $90 fair market value, and stock of a subsidiary with 
a $20 excess loss account and $10 fair market value. Under paragraph 
(c) of this section, T's net asset basis is $60 ($80 minus $20). See 
sections 351 and 358, and Sec.  1.1502-19. Consequently, P has a $60 
basis in S's stock. Under section 362 and Sec.  1.1502-19, S has an 
$80 basis in the operating asset and a $20 excess loss account in 
the stock of the subsidiary.

[[Page 40581]]

    (v) Liabilities in excess of basis. The facts are the same as in 
paragraph (i) of this Example 1, except that T's assets have a fair 
market value of $170 (and $60 basis) and are subject to $70 of 
liabilities. Under paragraph (c) of this section, T's net asset 
basis is negative $10 ($60 minus $70). See sections 351 and 358, and 
Sec. Sec.  1.1502-19 and 1.1502-80(d). Thus, P has a $10 excess loss 
account in S's stock. Under section 362, S has a $60 basis in its 
assets (which are subject to $70 of liabilities). (Under paragraph 
(a)(2) of this section, because the liabilities are taken into 
account in determining net asset basis under paragraph (c) of this 
section, the liabilities are not also taken into account as 
consideration not provided by P under paragraph (d)(1) of this 
section.)
    (vi) Consideration provided by S. The facts are the same as in 
paragraph (i) of this Example 1, except that P forms S with a $100 
contribution at the beginning of Year 1, and during Year 6, pursuant 
to a plan, S purchases $100 of P stock and T merges into S with the 
T shareholders receiving P stock in exchange for their T stock. 
Under paragraph (b)(1) of this section, P's $100 basis in S's stock 
is increased by $60 to reflect T's net asset basis. Under paragraph 
(d)(1) of this section, P's basis in S's stock is decreased by $100 
(the fair market value of the P stock) because the P stock purchased 
by S and used in the transaction is consideration not provided by P.
    (vii) Appreciated asset provided by S. The facts are the same as 
in paragraph (i) of this Example 1, except that P has owned the 
stock of S for several years, and the shareholders of T receive $60 
of P stock and an asset of S with a $30 adjusted basis and $40 fair 
market value. S recognizes a $10 gain from the asset under section 
1001. Under paragraph (b)(1) of this section, P's basis in S's stock 
is increased by $60 to reflect T's net asset basis. Under paragraph 
(d)(1) of this section, P's basis in S's stock is decreased by $40 
(the fair market value of the asset provided by S). In addition, P's 
basis in S's stock is increased under Sec.  1.1502-32(b) by S's $10 
gain.
    (viii) Depreciated asset provided by S. The facts are the same 
as in paragraph (i) of this Example 1, except that P has owned the 
stock of S for several years, and the shareholders of T receive $60 
of P stock and an asset of S with a $50 adjusted basis and $40 fair 
market value. S recognizes a $10 loss from the asset under section 
1001. Under paragraph (b)(1) of this section, P's basis in S's stock 
is increased by $60 to reflect T's net asset basis. Under paragraph 
(d)(1) of this section, P's basis in S's stock is decreased by $40 
(the fair market value of the asset provided by S). In addition, S's 
$10 loss is taken into account under Sec.  1.1502-32(b) in 
determining P's basis adjustments under that section.
    Example 2. Stock acquisition. (i) Facts. P is the common parent 
of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. Pursuant to a plan, P forms S and S acquires all of T's stock 
in exchange for P stock in a transaction described in section 
368(a)(1)(B). The transaction is also a reverse acquisition under 
Sec.  1.1502-75(d)(3). Thus, the transaction is a group structure 
change under Sec.  1.1502-33(f)(1), and the earnings and profits of 
P and S are adjusted to reflect T's earnings and profits immediately 
before T ceases to be the common parent of the T group.
    (ii) Analysis. Under paragraph (d)(4) of this section, although 
S is not the new common parent of the T group, adjustments must be 
made to S's basis in T's stock in accordance with the principles of 
this section. Although S's basis in T's stock would ordinarily be 
determined under section 362 by reference to the basis of T's 
shareholders in T's stock immediately before the group structure 
change, under the principles of paragraph (b)(2) of this section, 
S's basis in T's stock is determined by reference to T's net asset 
basis. Thus, S's basis in T's stock is $60.
    (iii) Higher-tier adjustments. Under paragraph (d)(4) of this 
section, P's basis in S's stock is increased by $60 (to be 
consistent with the adjustment to S's basis in T's stock).
    (iv) Cross ownership. The facts are the same as in paragraph (i) 
of this Example 2, except that several years ago S purchased 10% of 
T's stock from an unrelated person for cash and, pursuant to the 
plan, S acquires the remaining 90% of T's stock in exchange for P 
stock. S's basis in the initial 10% of T's stock is not redetermined 
under this section. However, S's basis in the additional 90% of T's 
stock is redetermined under this section. S's basis in that stock is 
adjusted to $54 (90% of T's net asset basis).
    (v) Allocable share. The facts are the same as in paragraph (i) 
of this Example 2, except that P owns only 90% of S's stock 
immediately after the group structure change. S's basis in T's stock 
is the same as in paragraph (ii) of this Example 2. Under paragraph 
(d)(2) of this section, P's basis in its S stock is increased by $54 
(90% of S's $60 adjustment).
    Example 3. Taxable stock acquisition. (i) Facts. P is the common 
parent of one group and T is the common parent of another. T has 
assets with an aggregate basis of $60 and fair market value of $100 
and no liabilities. T's shareholders have an aggregate basis of $50 
in T's stock. Pursuant to a plan, P acquires all of T's stock in 
exchange for $70 of P's stock and $30 in a transaction that is a 
group structure change under Sec.  1.1502-33(f)(1). P's basis in its 
acquired T stock is not determined in whole or in part by reference 
to the basis of the property exchanged for such stock. (Because of 
P's use of cash, the acquisition is not a transaction described in 
section 368(a)(1)(B).)
    (ii) Analysis. The rules of this section do not apply to 
determine P's basis in T's stock. Therefore, P's basis in T's stock 
is $100.

    (h) Effective dates--(1) General rule. This section applies to 
group structure changes that occur after the date these regulations are 
published as temporary or final regulations in the Federal Register. 
However, after the date these regulations are published as temporary or 
final regulations in the Federal Register, a group may apply this 
section to group structure changes that occur on or before the date 
these regulations are published as temporary or final regulations in 
the Federal Register and in consolidated return years beginning on or 
after January 1, 1995.
    (2) Prior law. For group structure changes that occur on or before 
the date these regulations are published as temporary or final 
regulations in the Federal Register and in consolidated return years 
beginning on or after January 1, 1995, with respect to which the group 
does not elect to apply the provisions of this section, see Sec.  
1.1502-31 as contained in the 26 CFR part 1 edition revised as of April 
1, 2003. For group structure changes that occur in consolidated return 
years beginning before January 1, 1995, see Sec.  1.1502-31T as 
contained in the 26 CFR part 1 edition revised as of April 1, 1994.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-17091 Filed 7-7-03; 8:45 am]
BILLING CODE 4830-01-P